Surcharge

What it means

Surcharge is an extra tax charged on people with high incomes. It is not charged on income directly. It is calculated as a percentage of the income tax payable, and health and education cess of 4% is then added on top of tax plus surcharge.

How it works

For individuals, HUFs and similar taxpayers, the surcharge rates depend on total income:

• Above ₹50 lakh up to ₹1 crore: 10%

• Above ₹1 crore up to ₹2 crore: 15%

• Above ₹2 crore up to ₹5 crore: 25%

• Above ₹5 crore: 37% under the old regime only. Under the new regime the maximum is 25%.

• On dividends and on capital gains taxed at special rates (such as listed shares and equity mutual funds, and long-term capital gains), surcharge is capped at 15%.

Marginal relief: when income just crosses a threshold, the extra tax plus surcharge cannot be more than the income above that threshold. This prevents a small rise in income causing a large rise in tax.

Example

Vikram, a business owner, has taxable income of ₹60,00,000 under the new regime.

1. Tax up to ₹24 lakh: ₹20,000 + ₹40,000 + ₹60,000 + ₹80,000 + ₹1,00,000 = ₹3,00,000.

2. Tax on income above ₹24 lakh: ₹36,00,000 x 30% = ₹10,80,000.

3. Income tax: ₹3,00,000 + ₹10,80,000 = ₹13,80,000.

4. Surcharge at 10% (income above ₹50 lakh): ₹1,38,000.

5. Marginal relief check: tax at exactly ₹50 lakh is ₹10,80,000. Extra tax for the additional ₹10 lakh of income is ₹15,18,000 - ₹10,80,000 = ₹4,38,000, which is less than ₹10,00,000, so no relief applies.

6. Cess at 4% on ₹15,18,000: ₹60,720.

7. Total tax: ₹15,78,720.

Key points to remember

• Surcharge is based on total income, including capital gains, not only salary.

• Cess is calculated after surcharge, not before.

• High earners above ₹5 crore save significantly under the new regime because the rate is capped at 25%.

• Always check marginal relief when income is just above ₹50 lakh, ₹1 crore, ₹2 crore or ₹5 crore.

• Higher surcharge also increases advance tax instalments, so plan quarterly payments accordingly.